Jayhawk Co. just paid a dividend of $2 per share. They anticipate growth of 18% over the next two years, then 13% the following year and then taper off to 6% per year thereafter. How much is the dividend at time 1 (D1)? How much is the dividend at time 2 (D2)? How much is the dividend at time 3 (D3)?
If investors require 12% return on their investment in Jayhawk Co, what is the time-3 present value of all cash flows beginning at time 4 and going forward thereafter into the future?
If investors require 12% return on their investment in Jayhawk Co at what price should the stock sell today?
Required rate= | 12.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 2 | 18.00% | 2.36 =D(1) | 2.36 | 1.12 | 2.1071 | |
2 | 2.36 | 18.00% | 2.7848 = D(2) | 2.7848 | 1.2544 | 2.22003 | |
3 | 2.7848 | 13.00% | 3.146824 = D(3) | 55.594 = PV of future CF at T3 | 58.740824 | 1.404928 | 41.81056 |
Long term growth rate (given)= | 6.00% | Value of Stock = | Sum of discounted value = | 46.14 |
Where | |||
Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||
Total value = Dividend + horizon value (only for last year) | |||
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate) | |||
Discount factor=(1+ Required rate)^corresponding period | |||
Discounted value=total value/discount factor |
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